Last week gave us more of the same bipolar market action we’ve been talking about — up one day, down the next — but underneath that chop, something encouraging happened. We saw rotation into the laggards, and that helped improve breadth. That’s what we want to see if this market is going to keep grinding higher.
The S&P 500 and Nasdaq 100 both pushed to new all-time highs, despite finishing July with a bearish reversal and a sharp gap down to start August. That resilience is a positive sign. But Friday’s options expiration probably kept the market capped, leaving the back half of the week stuck in a range.
Internally, the picture is mixed. On the positive side, the Russell 2000 and the Transports finally woke up, which tells us money is rotating into areas that had been left behind. That’s good for market health. But on the flip side, we saw deterioration in Financials, Technology, and especially Software and Internet ETFs. And semiconductors — the market’s prior leader — took a hit, with Applied Materials dropping 13% on Friday.
Looking at sectors:
- Technology and Communication Services continue to be strong, but leadership is narrowing.
- Consumer Discretionary broke out last week — driven by the belief that lower interest rates are coming. That’s boosted housing-related names, retail, and even autos like Tesla, GM, and Ford.
- Consumer Staples and Healthcare are where we saw defensive money rotate. Healthcare was actually the week’s biggest gainer, with strong moves from UnitedHealth, Eli Lilly, and Bristol-Myers. If these sectors can hold their gains at resistance, that would confirm institutions are accumulating.
- Utilities remain strong — remember, they consolidated for eight months before breaking out, and that supports their uptrend continuing.
- On the weak side, Industrials and Financials are showing potential Head & Shoulders tops, which haven’t confirmed yet but bear watching. Materials and Real Estate are still messy and erratic.
So where does that leave us? Market internals are neutral, giving room for movement either way. The theme right now is rotation: leaders slowing down, laggards catching up. That’s often how a bull market extends its life. September’s expected rate cut — which traders see as nearly a lock — is helping keep a bid under prices. But we don’t want a straight-up vertical move on the announcement; those often end badly with sharp reversals.
One concern last week was the uptick in 10- and 30-year yields, driven by inflation fears around tariffs. That’s a wildcard. And, as always, we keep in mind that options expirations often mark turning points. Last week’s expiration followed a two-week advance, which increases the odds of a pullback.
Big picture: we remain cautiously optimistic. As long as breadth continues to improve and laggards keep participating, the markets should be able to hold together. But cracks in former leaders remind us not to get complacent. In this type of environment, sector rotation and selective stock-picking are key.
And remember, sometimes the highest-probability trade is simply to sit on your hands and wait for the market to line up the way we want.
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